IRS Office of Appeals
The IRS Office of Appeals is in the business of settling tax disputes. It really does settle cases. It settles most tax cases.
The Taxpayer First Act made several changes to IRS Appeals, including renaming it to the IRS Office of Independent Appeals. It also codified the right–legal right–to an administrative appeal with IRS Appeals. Prior to this, the courts had held that there was no right to an administrative appeal. This does not mean a right to an in-person appeals conference, however.
The importance of IRS Appeals and its work is evident in the continued changes that are made to IRS Appeals and how it operates.
About the IRS Office of Appeals
The IRS Office of Appeals has a long history dating back to the early 20th century. The precursor to the Appeals Office was the Board of Tax Appeals, which was established in 1924 to provide an independent forum for taxpayers to challenge IRS tax assessments. The Board was made up of three members appointed by the President, and its decisions were final and binding on the IRS.
In 1942, the Board of Tax Appeals was replaced by the U.S. Tax Court, which was given the authority to hear and decide tax disputes between taxpayers and the IRS. The Tax Court was independent of the IRS and its decisions could be appealed to the federal courts.
Taxpayers often found the Tax Court process to be time-consuming and expensive, and there was a growing demand for a more efficient and informal way to resolve tax disputes. In response, the IRS established the Office of Appeals in 1927 as a separate and independent organization within the IRS.
The mission of the Appeals Office was to provide an independent, impartial, and timely resolution of tax disputes through mediation and negotiation. The Appeals Office was staffed by experienced tax professionals who were trained in dispute resolution and had the authority to settle tax disputes without the need for litigation.
Over the years, the Appeals Office has played an increasingly important role in the IRS’s tax administration system. Today, the Appeals Office handles over 100,000 cases annually and is responsible for resolving disputes involving all types of taxes, including income tax, estate and gift tax, and excise tax. The Appeals Office is still considered to be a key component of the IRS’s efforts to ensure fair and consistent treatment of taxpayers and to promote voluntary compliance with the tax laws.
Types of Cases Handled by Appeals
The IRS Office of Appeals handles a wide variety of cases involving federal taxes.
Generally, any taxpayer who has received an adverse decision from the IRS may request an appeal to the Office of Appeals. Some of the types of cases that the Office of Appeals handles include:
- Collection actions: The Office of Appeals handles appeals of collection actions, such as liens, levies, and seizures. Taxpayers who have received a notice of collection action may request an appeal to the Office of Appeals.
- Examination issues: The Office of Appeals handles appeals of examination issues, such as proposed adjustments to a taxpayer’s income or deductions. Taxpayers who have received a notice of proposed deficiency or other examination findings may request an appeal to the Office of Appeals.
- Penalty assessments: The Office of Appeals handles appeals of penalty assessments, such as penalties for failure to file a tax return or failure to pay taxes on time. Taxpayers who have received a notice of penalty assessment may request an appeal to the Office of Appeals.
- Innocent spouse relief: The Office of Appeals handles appeals of innocent spouse relief requests. Taxpayers who are seeking relief from joint liability for taxes due to the actions of their spouse may request an appeal to the Office of Appeals.
- Employment tax issues: The Office of Appeals handles appeals of employment tax issues, such as worker classification disputes or trust fund recovery penalty assessments. Employers who have received a notice of proposed employment tax assessment may request an appeal to the Office of Appeals.
IRS Appeals also has post-appeals mediation cases and fast-track settlement cases.
The Administrative Appeals Process
The IRS Appeals Office process generally involves the following steps:
- Receipt of a Notice of Deficiency or other IRS determination: The Appeals process begins when a taxpayer receives a Notice of Deficiency or other IRS determination, such as a proposed assessment of taxes or penalties.
- Filing a Request for Appeals: The taxpayer may file a Request for Appeals within a specified period of time, typically 30 days from the date of the Notice of Deficiency or other determination. The Request for Appeals must be in writing and should include a statement of the taxpayer’s position and supporting documentation.
- Assignment to an Appeals Officer: Once the Request for Appeals is received, the case is assigned to an Appeals Officer who is independent from the IRS office that made the determination. The Appeals Officer reviews the case and may request additional information from the taxpayer or the IRS.
- Settlement Discussions: The Appeals Officer may initiate settlement discussions with the taxpayer and the IRS to try to reach a mutually acceptable resolution of the case.
- Appeals Case Memorandum: An “ACM” stands for “Appeals Coordinated Issue Memorandum.” An ACM is a document used by the Appeals Office to identify and address specific legal or factual issues in cases. The purpose of an ACM is to document the appeals officer’s recommendation. It will include a summary of the legal and factual background of the issue, as well as guidance on how to apply the relevant law and regulations. This is used internally to show the IRS appeals case manager why they should accept the appeals officer’s determination. The ACM is usually not shared with taxpayers or other IRS functions.
- Computations: For cases where computations are involved, the IRS will prepare calculations if it makes any adjustments to the originating function’s numbers. IRS Appeals employs tax compliance officers (“TCOs”) whose job it is to perform these calculations.
- Issuance of a Determination Letter: If a settlement is or is not reached, the appeals officer will issue a determination letter. This may include notices of determination, claim allowance or disallowance letters, etc.
If the taxpayer disagrees with the Notice of Determination, they may have the right to further appeal to the U.S. Tax Court or another court of law.
Access to IRS Records
Section 7803(e)(7) mandates that IRS Appeals provide “specified” taxpayers access to the nonprivileged portion of their case files at least ten days before their conference with Appeals. This requirement applies only to documents related to the disputed issues and does not include access to documents the taxpayer previously provided to the IRS.
A “specified taxpayer” is an individual taxpayer whose adjusted gross income does not exceed $400,000 or other taxpayers whose gross receipts for the taxpayer year at issue do not exceed $5 million.
Taxpayers have the option to waive the 10-day deadline if they choose to do so. However, if the deadline is not waived, Appeals must provide access to the nonprivileged portion of the case files to the taxpayer at least ten days before the conference with Appeals.
Ex Parte Communications
The term “ex parte” is often used in legal proceedings to describe a one-sided or biased perspective that is presented on behalf of one party or side only. In the context of the IRS and IRS Appeals, an ex parte communication refers to a conversation or exchange of information between an Appeals employee and other employees of the IRS without the taxpayer or their representative being given the opportunity to participate in the communication.
To maintain its independence and impartiality, the IRS prohibits certain types of ex parte communications. The prohibition is outlined in Revenue Procedure 2012-18, which provides guidance on the types of communications that are prohibited and the consequences of violating the prohibition.
Again, the general rule is that ex parte communications are prohibited. This means that all communications between the IRS and a taxpayer or their representative during an appeal must be made in the presence of or with the consent of the taxpayer or their representative. The purpose of this rule is to ensure that both parties have equal access to information and an opportunity to respond.
There are several exceptions to this general rule:
- Written authorization: If the taxpayer or their representative provides written authorization, the IRS may communicate with other parties outside of the presence of the taxpayer or their representative. For example, a taxpayer may authorize the IRS to speak with their tax attorney about specific tax matters.
- Waiver of right to be present: In some cases, a taxpayer or their representative may waive the right to be present during a communication. This waiver must be voluntary, knowing, and intelligent, and must be made in writing. The IRS must inform the taxpayer or their representative of their right to be present and must obtain their consent before proceeding with an ex parte communication.
Even if an ex parte communication is allowed, the IRS appeals officer must maintain a record of the communication and provide a copy of the record to the taxpayer or their representative upon request. The record must include the names of all parties involved, the date and time of the communication, and a summary of the information exchanged.
New Issues in IRS Appeals
IRS appeals officers are not supposed to raise new issues. This is explained in Section 3 of Revenue Procedure 2012-18.
There are only limited instances where this is permissible, including:
- The issue must be consistent with the factual development of the case. This means that the new issue must be based on the facts and evidence already presented in the case, and must not introduce new facts or evidence.
- The taxpayer must be given an opportunity to respond to the new issue. This means that the taxpayer must be given notice of the new issue and an opportunity to provide additional information or arguments in response.
- The new issue must not result in unfair surprise to the taxpayer. This means that the taxpayer must have a reasonable opportunity to prepare and respond to the new issue, and that the new issue must not be so significant that it would prejudice the taxpayer’s position in the case.
It’s important to note that a “new issue” is different from a “new theory.” A new issue refers to a new legal or factual matter that has not been raised by the IRS or the taxpayer before. For example, if the IRS initially challenges a taxpayer’s deduction for business expenses, but later raises an additional issue related to the taxpayer’s classification of certain workers as independent contractors, that would be considered a new issue.
In contrast, a new theory refers to a new legal argument or interpretation of the law that is based on the same facts and evidence already presented in the case. For example, if the IRS initially argues that a taxpayer did not properly substantiate their business expenses, but later argues that the expenses were not ordinary and necessary for the taxpayer’s trade or business, that would be considered a new theory.
The IRS Appeals Judicial Approach
The IRS Office of Appeals takes a judicial approach to resolving tax disputes, which means that it seeks to apply the law in a fair and impartial manner. The appeals officer assigned to the case acts as an impartial decision-maker and considers both the taxpayer’s arguments and the IRS’s position.
In general, the judicial approach followed by the IRS Office of Appeals involves several key principles:
- Impartiality: The Appeals Officer must be impartial and unbiased in considering the facts and arguments presented by both the taxpayer and the IRS. The Appeals Officer must base their decision solely on the law and the facts of the case, without regard to the identity of the parties involved.
- Consistency: The Appeals Officer must strive to apply the law in a consistent manner to ensure that taxpayers are treated fairly and that similar cases are decided in a similar manner. The Appeals Officer may consider precedents and guidance from the IRS and the courts in making a decision.
- Transparency: The Appeals Officer must explain their decision in a clear and understandable manner, including the legal and factual basis for the decision. The taxpayer must have an opportunity to review and respond to the Appeals Officer’s decision.
- Flexibility: The Appeals Officer may consider a wide range of factors in making a decision, including the taxpayer’s financial situation, the potential impact of the decision on the taxpayer, and the overall fairness of the result. The Appeals Officer may also consider alternative dispute resolution methods, such as mediation, to try to reach a resolution that is acceptable to both the taxpayer and the IRS.
Overall, the judicial approach followed by the IRS Office of Appeals is designed to promote fairness and consistency in the resolution of tax disputes. By acting as an impartial decision-maker and applying the law in a consistent and transparent manner, the appeals officer seeks to ensure that taxpayers are treated fairly and that disputes are resolved in a timely and efficient manner.
How IRS Appeals Settles Cases
The IRS Appeals Office uses the concept of Hazards of Litigation to settle cases with taxpayers. Hazards of Litigation refers to the risks and uncertainties that both the taxpayer and the IRS face if the case were to proceed to litigation. The appeals officer will consider the strengths and weaknesses of each party’s position, as well as the potential costs and time involved in litigating the case.
Once the appeals officer has identified the Hazards of Litigation, they may use this information to negotiate a settlement with the taxpayer. The settlement may involve a reduction in the amount of tax owed, a compromise on the issue in dispute, or some other type of resolution that is acceptable to both parties.
Some examples of how cases are settled using the Hazards of Litigation approach include:
- Trading Issues: In some cases, the taxpayer and the IRS may have multiple issues in dispute. The Appeals Officer may use the Hazards of Litigation to trade off concessions on one issue for a concession on another issue. For example, the IRS may agree to reduce the amount of taxes owed on one issue if the taxpayer agrees to concede another issue.
- Nuisance Settlements: In some cases, the cost of litigating a case may outweigh the potential benefits. The Appeals Officer may use the Hazards of Litigation to negotiate a nuisance settlement with the taxpayer, where the taxpayer agrees to pay a reduced amount of taxes or penalties in exchange for avoiding the cost and uncertainty of litigation.
- Compromises: In some cases, the Appeals Officer may use the Hazards of Litigation to negotiate a compromise on the issue in dispute. For example, the Appeals Officer may suggest a settlement that splits the difference between the taxpayer’s position and the IRS’s position, or that allows the taxpayer to pay the tax owed over a longer period of time.
Overall, the Hazards of Litigation approach used by the IRS Appeals Office is designed to promote settlement of tax disputes in a fair and efficient manner. By considering the risks and uncertainties of litigation, the appeals officer seeks to reach a resolution that is acceptable to both the taxpayer and the IRS, while avoiding the cost and time involved in litigation.
Closing Cases in IRS Appeals
If the IRS agrees to settle a case that is not a full allowance or disallowance, it will typically issue one of three forms to settle the case:
- Form 870, Waiver of Restrictions on Assessment and Collection: This form is used by the IRS Appeals Office to close a case in which the taxpayer has agreed to pay the amount of taxes owed without contesting the issue further. By signing this form, the taxpayer waives their right to challenge the assessment or collection of the taxes owed, except in certain limited circumstances. The form is generally used in cases where the taxpayer agrees with the IRS’s determination and wants to avoid further litigation.
- Form 870-AD, Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment: This form is used to settle a tax deficiency case. The form is signed by both the taxpayer and the IRS and includes the terms of the settlement, including the amount of the deficiency owed and any penalties or interest. The form also includes a waiver of the taxpayer’s right to challenge the assessment or collection of the deficiency in court.
- Formal Closing Agreement: This is a document signed by both the taxpayer and the IRS that finalizes the resolution of a tax dispute. It is often used in cases where there is a significant amount of money at stake, or where the issue in dispute is complex. The agreement includes a detailed description of the issue, the positions of both the taxpayer and the IRS, and the terms of the agreement. The agreement is binding and generally cannot be challenged by either party.
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